Monday, May 31, 2010

For summer jobs, this will probably be the worst year since the Great Depression.

This graph shows the unemployment rate for workers 16 to 24 years old (from the BLS), and the headline unemployment rate (blue). The unemployment rate hit a record 19.6% in April for this group.

No question that the chart Calculated Risk shows (16-24 year old unemployment) is ugly. As detailed above, the 19.6% is the highest rate on record, yet does compare closely with the 19% rate seen in November 1982 for 16-24 year olds. What is completely dislocated from the past is what we are currently seeing among 16-17 year olds (i.e. the high school [rather than college] working class).

While the unemployment rate among 16-17 year olds is 29.1% (from a 1980's peak of 27.1%), that rate is missing the fact that high school age kids quite simply are no longer bothering to look for jobs, thus are not counted in the unemployment rate. The following chart shows the percent of the 16-17 and 16-19 year old population employed as a percent of the population (the 16-17 year old employment levels have literally been halved over the last 10 years).

My concern regarding these unemployed teens is not necessarily related to their current situation (it sucks, but their consumption isn't dependent on their compensation - it is more broadly the "income" they are getting from their parents that matters). Rather, my concern is how this market will impact these workers over the long term. How many of "us" previous generations learned what it meant to "work" from these initial high school and college jobs (I was a painter, waiter at a diner, factory worker, lawn mower, and retirement community chef at various times before I turned 18)?

Please note this still misses a HUGE sources of return (dividends), which accounts for a much larger share of actual returns than people think. An almost identical amount as change in index in fact (dividend yield has averaged 4.49% since 1871, while returns on the index have averaged 4.45% over that same time frame). It makes the current ~2% dividend yield look awfully small.

I will look to show results of total S&P 500 return vs. the Fair Value method next week.

My Not Sustainable post from last month involved the same inputs; compensation (not to be confused with total income) and consumption. Noted back then was that real compensation has declined ~$400 billion, while consumption has jumped ~$150 billion since March 2007.

This month's 'Not Sustainable' goes back further... the recent period of over-consumption started as much as 30 years ago.

People now consume ~135% of compensation earned before taxes and ~155% of compensation earned after taxes paid. For some people, this may make sense (depends where you are in your life cycle / if you have other sources of wealth). But the ~135% and ~155% is the AVERAGE for every American at every age group and as we learned in 2007-2008, wealth can be fleeting.

The U.S. economy grew at a 3.0% pace in the first quarter - lower than the 3.2% previously reported - owing mainly to smaller increases in consumer spending and investment in business software, the government said Thursday. Economists surveyed by MarketWatch expected first-quarter growth to be revised up to 3.5%.

The latest revision incorporates data that is not available for the first reading of GDP. Consumer spending, the largest contributor to GDP, grew at 3.5% annualized rate in the first quarter, down from the initial estimate of 3.6%. The increase in business investment, meanwhile, was reduced to 13.1% from the original estimate of 14%.

Step 1) Take the S&P 500 Index (lots of data here) and divide that level by the current level of nominal GDP (you can find that here).

Below is a chart of just that going back to 1950 and the corresponding 60 year average.

Step 2) Take that 60 year average (8.2184%) to normalize the first year of your 'Fair Value S&P 500' "FV" Index by taking nominal GDP at the starting date (in this case June 1950 = $284.5 billion) and multiplying by the percent (x 8.2184% = 23.83). In this case 23.83 = the FV Index level.

Step 3) Using that 23.83 (or calculated value using a different time frame) as the FV Index starting value, at each interval increase the index by the change in nominal GDP (note... in the chart below, I estimated the S&P value for Q2 end at today's closing level and Q2 GDP at 4.0% annualized). Why nominal GDP? Go here.

The below chart shows this FV Index against the actual S&P 500 index.

Step 4) Calculate the percent the S&P 500 Index is over or under valued relative to the FV Index.

Proof....

Note 1: under this methodology, the S&P 500 is currently slightly below fair valueNote 2: a change in the starting value of the FV Index would simply shift the x-axis to the right or left (i.e. it would not change the relationship between the two)

Wednesday, May 26, 2010

New homes sales surged last month as home buyers rushed to take advantage of a government tax credit that has helped lift the housing market, according to government data released Wednesday.

The sales of new single-family homes rose 14.8 percent in April compared with the previous month to a seasonally adjusted annual rate of 504,000, according to Commerce Department data. It was up 47.8 percent compared to the same period a year ago.

Sales rebounded the most in the Midwest, 31.6 percent. They rose 10.8 percent in the South, which includes the Washington region, and increased 21.7 percent in the West. Sales were flat in the Northeast.

That follows an industry report this week that sales of existing homes, which make up the majority of the market, jumped 7.6 percent in April.

Economists who follow the industry say the reports reflect the impact of low mortgage rates and a $8,000 tax credit available to some first-time home buyers and a $6,500 tax credit available to some repeat homeowners who buy a new primary residence. To qualify for the tax credit, a buyer must have entered into a contract by April 30 and complete the transaction by June 30.

Airplane demand pushed the overall gain, which was bigger than the 2.2% expected. Nondefense aircraft and parts surged 228.0% in April.

Outside of the transportation sector, orders for all other durables decreased 1.0% in April. Yet the report contained evidence of the health in the manufacturing sector -- which has been a leader of the U.S. economy's recovery -- and softened fear lurking about what impact the Greek debt crisis might have on U.S. exports into the euro zone.

Paul Krugman points out that no matter how much some things have changed, Ten Year Treasury rates (though noisy) have remained the same (note: I am hesitant to agree with his argument... a lot of what has happend over the past 12 months [struggling global economy / geopolitical conflict / uncertainty, austerity measures, re-regulation] are all reasons why Treasury rates would stay low).

Tuesday, May 25, 2010

Calculated Risk details that according to the CBO, stimulus (i.e. the American Recovery and Reinvestment Act "ARRA") raised GDP in Q1 by an estimated range of 1.7% to 4.2%. Since reported GDP growth was 3.2% annualized for the quarter, this means that if the impact of stimulus was at the high-end of the range, GDP "would have" been negative in Q1.

The chart below shows actual GDP and a range for GDP ex-stimulus (simply actual GDP less the estimated impact of the stimulus at the low and high-end ranges as detailed by the CBO).

The bad news?

This shows just how fragile the system is.

The good news?

The impact of stimulus is expected to be strong the remainder of the year (Q2 '10: 1.7% - 4.6%, Q3 '10: 1.4% - 4.2%, Q4 '10: 1.1% - 3.6%)

“The housing market may be in better shape than this time last year, but, when you look at recent trends there are signs of some renewed weakening in home prices,” said David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “In the past several months we have seen some relatively weak reports across many of the markets we cover.”

A separate Case-Shiller index that is released quarterly and covers the U.S. showed home prices fell a seasonally adjusted 1.3% in the first quarter of the year compared to the fourth quarter of 2009.

This weakening becomes more interesting due to all the buyers that flooded the market to take advantage of the tax credit. One would think this would have resulted in higher prices, but we'll see the full impact of that in April's figure (and potential decline post-credit in May).

Just getting to some posting, as I took the day off (planned for a few weeks). As today just happened to coincide with the nicest day of the year, I must say that my own outlook is improved.

Speaking of an improved outlook... consumer confidence jumped in May (how is THAT for a segue!). These numbers are still VERY low (less than 5% of those polled see a plentiful job market), but improved none-the-less. To the details (per the Biz Journal):

Consumer confidence has risen again this month, the third-straight month of gains, according to The Conference Board.

The Conference Board Consumer Confidence Index rose to 63.3 in May, compared with 57.7 in April.

“Consumer confidence posted its third consecutive monthly gain, and although still weak by historical levels, appears to be gaining some traction,” Lynn Franco, director of the New York nonprofit’s Consumer Research Center, said in the release.

Corporate bond sales are poised for their worst month in a decade, while relative yields are rising at the fastest pace since Lehman Brothers Holdings Inc.’s collapse as the response by lawmakers to Europe’s sovereign debt crisis fails to inspire investor confidence.

Companies have issued $47 billion of debt in May, down from $183 billion in April and the least since December 1999, data compiled by Bloomberg show. The extra yield investors demand to hold company debt rather than benchmark government securities is headed for the biggest monthly gain since October 2008, Bank of America Merrill Lynch’s Global Broad Market index shows.

Concern that European leaders won’t be able to coordinate a response to rising levels of government debt from Greece to Spain, while U.S. legislation threatens to curb credit and hurt bank profits, is driving investors away from all but the safest securities. The rate banks say they charge each other for three- month loans in dollars has almost doubled since February.

Thursday morning, the Conference Board released its report on leading economic indicators in the month of April, showing that its leading economic indicators index unexpectedly declined for the first time in more than a year.

The report showed that the leading economic index edged down by 0.1 percent in April following a downwardly revised 1.3 percent increase in March. The decrease came as a surprise to economists, who had expected the index to increase by 0.2 percent.

Wednesday, May 19, 2010

After the Moody's/REAL Commercial Property Price Index appeared to be bottoming in January, EconomPic stated:

So have we hit a bottom? For the time being... possibly. But longer term, I am not so sure in nominal terms and even less confident in real terms.

Lets put the current price level in perspective. We have come a LONG way (down 44% from peak to current trough), but price levels are now just slightly below the level seen in January 2001 (in real terms). What's different now than then?

Continued flight to high quality yield (a 3.36% 10 year Treasury yield when 4% was "rich" a bit more than a month ago... amazing for sure, but is it now overbought?)

Most notably... an inflation protection (i.e. hard asset) sell-off (was it once people digested the CPI print?)

There are too many people (including me) piled into the reflation trade with the view that the Fed will do anything it takes to get the job done (i.e. the strong preference for inflation vs. deflation). Thus, when it moves the other way... it MOVES the other way.

The issue is that over the shorter term it is likely to move the other way often as we are in an extremely disinflationary environment (high unemployment, low capacity utilization, low growth, deleveraging private and public balance sheets via increased savings).

That said, I am allocating for "reflation" as once it moves (in months / years), it could move quickly.

Consumer prices in the United States fell 0.1% on a seasonally adjusted basis in April as energy, housing, auto and apparel prices declined, the Labor Department reported Wednesday.

It was the first decline in the consumer price index since March 2009. The consumer price index is up 2.2% in the past year.

The core CPI -- which excludes food and energy prices in order to get a better view of underlying inflation -- was unchanged in April, lowering the year-over-year increase in core inflation to 0.9%, the lowest rate since January 1966.

The report was better than expected. Economists surveyed by MarketWatch nailed the 0.1% drop in the headline CPI, but were expecting a 0.1% gain in the core rate. See our complete economic calendar and consensus forecast.

Not sure how a negative print and a 0.9% year over year core print are "better than expected"; to me this is a sign of disinflation (or potential deflation). Not only was the year over year core the lowest level in 44 years, but the rate will likely be headed lower in the near future due to all the concerns that are causing a flight to the dollar (an increase in the value = a decrease in the cost of goods / services all else equal).

First details of the latest headline print showing almost all "inflation" remains in transportation costs.

And details of transportation price increase show they are almost entirely concentrated in fuel.

With a 15% drop in the price of oil over the past month and more favorable year over year comparisons going forward, expect the headline rate to come down further in the coming months.

Tuesday, May 18, 2010

Producer prices ticked down 0.1% in April, under forecasts of a 0.1% rise and following a 0.7% increase in March. Falling prices for finished energy goods and food products sparked the headline turndown, with liquified petroleum gas off 5.8%, natural gas down 1.3%, and gasoline down 2.7%.

Meanwhile, Intermediate goods prices rose 0.8% and crude goods fell 1.2%, pulled down by a 19% drop in natural gas. Headline PPI was 5.5% higher compared to April 2009. Core prices showed a 1% increase from the same month last year.

UK Inflation has yet again hit a new high of CPI 3.7% up from last months inflation peak of 3.4%, with RPI rocketing even higher to an eye watering 5.3%, a level not seen since 1991. The academic economists were again taken by surprise. The Bank of England's failure in its primary duty of targeting inflation has prompted the Governor Mervyn King to write another letter to this time the new Chancellor George Osbourne that will again state for the fifth time this year that the rise in inflation above 3% was temporary and not to worry, it should come down, eventually (fingers crossed).

The concern is that it appears the upward trend in prices is widespread (i.e. not just an energy phenomenon per the U.S.).

The largest upward pressures to the change in the CPI annual rate between March and April came from:

Clothing and footwear where prices, overall, rose by 2.2 per between March and April this year but rose by only 0.2 per cent a year ago; this was mainly due to garments and, in particular, women’s clothing.

Food and non-alcoholic beverages, mainly due to the food component where upward effects were widespread rather than from one particular food group. Reports have suggested that the closure of European airspace as a result of the Icelandic volcano had a limited impact on food prices in April.

Alcoholic beverages and tobacco where prices, overall, rose by 2.1 per cent between March and April this year (driven by the increases in excise duty that came into force towards the end of March) but were unchanged a year ago.

Monday, May 17, 2010

The Treasury Department said Monday it will lose $1.6 billion on a loan made to Chrysler in early 2009. Taxpayer losses from bailing out Chrysler and General Motors are expected to rise as high as $34 billion, congressional auditors have said.

Remember the good old days (waaaaayyyy back in the summer of '08) when this was just a "liquidity" problem? Lets go back to what GM was saying at the time (via an August 2008 Bloomberg article):

"Our plans, which require significant investments, are at risk because of limited access to capital,'' said Greg Martin, a spokesman for Detroit-based GM. He declined to comment on whether GM is seeking more than the original $25 billion. "This program will open capital that is necessary to make sure our transformational plans continue at full speed and give us the best chance to succeed.''

And what better way to look back at that "liquidity" problem than some recycled charts from EconomPic.

Manufacturing activity in the New York region improved at a slower pace in May, the New York Federal Reserve Bank said Monday. The bank's Empire State Manufacturing index decelerated to 19.1 in May from 31.9 in April. The drop suggests the pace of growth slowed in May. New orders and shipments moved lower but remained in positive territory.

The index for the number of employees rose to its highest level since 2004.The Empire State index is of interest to investors and economists primarily because it's seen as an early indicator of what the Institute for Supply Management's May national factory survey due out in two weeks may show. In April, the ISM manufacturing index showed continued good news for manufacturers, jumping to 60.4, the first time it had exceeded the 60 threshold since June 2004.

Merkel probably relented because she didn't want to be accused of breaking up the eurozone and endangering the EU collapse. She should know better, as France cannot possibly afford to go it alone. She should have called Sarkozy's bluff.

And your video of the week... the "classic" Red Hot Chili Pepper's Under the Bridge. I hate to admit that this can be classified as "classic", but this song came out 18 years ago [1992]. The difference between 1992 and the year the Eagles released Hotel California (something I would have labeled a "classic" in high school)? 16 years. In other news... I feel old.

John Lonski, chief economist at Moody’s Investor Service, points out an interesting nugget within the March trade figures, released on Wednesday by the Commerce Department, in a note to clients today. March was “a watershed month,” he says, as “For the first time in recorded history, the moving 12-month sum of $227.6 billion of U.S. merchandise exports to Asia’s emerging market countries surpassed the… $223.7 billion of such exports to the European Union.”

In the year through March, he notes, U.S. merchandise exports to emerging Asia — which includes China, India, Hong Kong, Taiwan, Korea plus a handful of smaller nations — rose by 3.7% while shipments to the EU dropped by 13.9%. In other words, U.S. exports to Europe have already been dwindling while Asia has becomean increasingly important destination for U.S. goods. That should help U.S.companies avoid too much of a hit from euro zone woes.

While my figures don't exactly match those detailed above, the story is the same. The emerging world is becoming a larger and more important partner to the United States by the day, while Europe is moving the other direction (and will continue to do so as long as the Euro continues down its current path).

In fact, one can (and plenty have) argue that the only way for the U.S. to get out of the issues currently faced is through the demand coming out of the emerging world.

Sales at U.S. retailers rose more than expected in April, lifted by a surprise gain in motor vehicle purchases, government data showed on Friday.

The Commerce Department said total retail sales rose 0.4 percent following an upwardly revised 2.1 percent surge in March. Sales in March were previously reported to have increased 1.9 percent. Retail sales have now increased for seven straight months.

Analysts polled by Reuters had forecast retail sales rising 0.2 percent last month. Compared to April last year, sales were 8.8 percent higher.

From 1996 - 2008, the Greek economy expanded faster than the broader European Union in each and every year (below is all the data I could dig up for a chart).

But, growth is a good thing right?

In most cases... sure, but all growth is not the same. Growth based on ever-expanding debt (think housing bubble) is surely not as good as one based on increased productivity. While there is no doubt that a lot of Greece's growth was due to increased productivity that came with being a member of the EU (i.e. open markets), a lot of this growth came from cheap financing which not only allowed the Greek economy to double within a 10 year period, but to double their debt levels as well.

This arrangement of growth and ever-increasing debt was all good... until it wasn't.

When the Greek economy turned south during the crisis, debt to GDP levels spiked as debt continued to grow, but the underlying economy didn't. When banks realized they all owned a boatload of this debt (as well as debt of other periphery nations in similar situations as Greece), they shunned further purchases.

Why? It turned out that the Greek economy that only grew in one direction (and faster than Europe as a whole), was loaded with debt and wasn't actually growing.

Wednesday, May 12, 2010

The United States set two budget records in April. First, the $82.7 billion monthly budget deficit was the highest ever for that month. Second, it was our 19th consecutive monthly deficit, the longest streak of red ink on the books.

While the pace is rather astounding, what is interesting (to me) is that the pace of increase is actually much slower in nominal terms (i.e. steepness of the blue line) than what we saw throughout the 1970's (due to higher inflation) and 1980's (due to massive tax cuts to "starve the beast").

Remarkably, the problem is currently less related to the level of nominal debt (still a problem) as much as the fact that our economy is not keeping pace (not a surprise as the increase in the level of debt was a response to the economic slowdown).

The result... the fastest increase in debt relative to GDP (i.e. the steepness of the red line) since WWII.

There were 2.7 million job openings on the last business day of March 2010, the U.S. Bureau of Labor Statistics reported today. The job openings rate was unchanged over the month at 2.0 percent. The hires rate (3.3 percent) was little changed, and the separations rate (3.1 percent) was unchanged in March. This release includes estimates of the number and rate of job openings, hires, and separations for the total nonfarm sector by industry and geographic region.

The chart below shows the level of job opening and hires as a ratio of the total number of unemployed.

U.S. crude inventories [increased] by more than twice the expected volume in the week ended May 7, according to data released Wednesday by the Energy information Administration unit of the U.S. Department of Energy.

Crude oil stockpiles rose 1.9 million barrels to 362.5 million barrels, compared with an average survey estimate of a rise of 800,000 barrels.

Global trade rebounded further in March, driving U.S. exports and imports to their highest levels since October 2008, the Commerce Department estimated Wednesday.

The U.S. trade deficit - the difference between exports and imports of goods and services - increased by $1 billion to a seasonally adjusted $40.4 billion, the highest since December 2008 when global trade contracted violently after the September 2008 financial crisis.

In March, imports increased 3.1% to $188.3 billion, while exports climbed 3.2% to $147.9 billion. Shipments of raw materials increased the fastest, but all categories of imported and exports goods showed growth.

Trade flows have not fully recovered from the brutal global recession, however. Real imports remain about 10% below the peak established two years ago. Real exports are 7% beneath the peak of August 2008.

The economy in the euro area expanded only modestly during the first quarter of the year, as demand in countries like Germany and France remained sluggish despite the recovery in exports.

Gross domestic product expanded by 0.2 percent in both the 16-member euro area and 27-member European Union, compared with the previous three months, according to initial estimates from Eurostat, the statistical office of the European Union.

While full details of the euro-area numbers are not yet available, analysts noted that business surveys point to a stronger pickup from the end of first quarter going into the second.

Gilles Moëc, an economist at Deutsche Bank in London, said that on one side, fairly strong external demand, helped by the depreciation of the euro, is giving exports a lift. On the other hand, the employment situation is grim, and “the consumer element is missing.”

The concern from here is the impact of austerity moves on these European economies. Per Business Week:

Greece’s economy contracted in the first quarter as the government cut spending and raised taxes in a bid to trim the European Union’s second-biggest budget gap. Gross domestic product shrank 0.8 percent from the fourth quarter, when it fell by the same amount, the Athens-based Hellenic Statistical Authority said in an e-mailed statement today.

The pace of the contraction will accelerate in the next two quarters as the austerity moves, coupled with higher inflation and job losses, lead to “a double-digit decline in household disposable income,” said Nicholas Magginas, an economist at National Bank of Greece SA in Athens. “The sharp drop in imports will only mitigate the negative impact on GDP growth.”

Tuesday, May 11, 2010

Investors have been stocking up on gold in the face of sovereign debt issues in Greece and other countries. Combined exchange traded fund gold holdings reached a record 59.11 million ounces by 6 May, up 943,686 ounces in one week.

59.11 million ounces / 32,000 ounces in a tonne = ~1850 tonnes of gold in ETFs.

How much is that? A LOT.

Below is a chart detailing the eleven largest holders of gold; nine central banks, the International Monetary Fund and ETFs.

Absolutely wild considering the first Gold ETF was launched in 2003. And Business Week details that it isn't only private investors diving into the metal:

Central banks added the most gold to their reserves since 1964 last year amid the longest rally in bullion prices in at least nine decades, data compiled by the World Gold Council show.

Combined holdings rose 425.4 metric tons to 30,116.9 tons, an increase worth $13.3 billion at last year’s average price, according to the data. India, Russia and China said last year they added to reserves. The expansion was the first since 1988, the data from the London-based council show.

Central banks, holding about 18 percent of all gold ever mined, are expanding their holdings for the first time in a generation as investors in exchange-traded funds amass bullion as an alternative to currencies.

March Wholesale Inventories rose .4%, a touch below expectations of a gain of .5% and with a 2.4% rise in sales, the inventory to sales ratio fell to a record low of 1.13 months down from 1.16 in February.

Thus, while we’ve seen a big reversal in the absolute level of inventory drawdowns that has lifted GDP over the past 4 quarters, the restocking that typically follows in past recoveries has been muted. Of course though, the backdrop is very positive for production if the pick up in end demand becomes sustainable.

Auto inventories at the wholesale level rose for a 2nd straight month but are still down 11.2% y/o/y. Inventories of computers rose for the 6th month in the past 7 and are up 10.7% y/o/y but the sales of computers are up 15.4% y/o/y. Wholesale inventories of machinery fell for the 14th straight month.

The chart below shows the components of the jump, which is widespread.

But as EconomPic has detailed before... these are in nominal terms (unfortunately no time to break out how much is real vs. nominal). The biggest increase was in lumber, which jumped ~15%. Unfortunately, the price of lumber also jumped ~15% in March (and is up a whopping 50% YTD) and the second largest jump was in petroleum, but oil jumped ~7% in March (and has since collapsed a bit).

I am hopeful with the reduced inventory levels should the economy pick up, but don't read too into the whopping sales figure.

Europe is in a tough situation as all European economies are not in the same situation with regards to debt levels (i.e. solvency risk) or shorter term economic strength.

With all this liquidity being pumped into the system, Europeans must now also deal with potential overheating in those parts of Europe in less need of stimulus. With all this uncertainty over the Euro, it is not a surprise that gold has spiked to a record high in Euros (the chart below is an estimate of this figure using GLD [gold ETF] and FXE [Euro ETF] as approximations - multiply by 100 to get an approximation of Gold in Euros).